IFIS NPL Market Watch
Forecast 2024-2026
Banca IFIS publishes an update of its regular report on the Non-Performing Loans (NPL) market in Europe, focusing primarily on trends from 2024 to 2026, with special attention to the Italian banking system.
The European Non-Performing Loan Market: Trends, Challenges, and Projections for 2024-2026
Europe's Non-Performing Loan (NPL) market has seen significant shifts in recent years, with notable regional variations. As we move into the 2024-2026 forecast period, the NPL landscape continues to evolve, shaped by economic factors, policy changes, and the competitive dynamics of the banking sector.
NPL Market Trends in Europe
The European Union (EU) banking system has witnessed a moderate increase in NPL stocks since early 2023. The significant rise, particularly in Germany (+€9.4 billion) and France (+€8.8 billion), has contributed to the overall increase in the NPL ratio. In contrast, Italy has demonstrated a declining trend, with its NPL stock reducing by €5.1 billion during the same period.
The NPL ratio for significant banks across the EU stood at 1.86% in Q2 2024, up slightly from 1.84% at the end of 2023. Rising impaired loans have fueled this increase, mainly in large economies like Germany and France. On the other hand, Italy has bucked this trend, showcasing a decline in its NPL ratio, driven by effective public policies and supportive measures for businesses.
Italian Banking Sector: A Positive Outlier
Italy’s NPL stock has significantly decreased, defying the broader European trend. This reduction is attributed to public interventions and a proactive approach to managing distressed loans. The country’s Stage 2 Ratio (loans with increased credit risk) decreased from 11.5% to 9.4%, aligning with the EU average of 9.3%.
The deterioration rate of loans in Italy has reached a historical low of 1.01% in 2024, with forecasts projecting a moderate rise to 1.29% in 2025 before declining again in 2026. The proactive measures adopted by Italian banks have contributed to this stability, indicating a well-controlled NPL environment in the country.
NPL Transaction Market Projections
NPL transaction volumes are expected to see a decrease in 2024, with total NPL volumes forecasted to reach €19 billion. However, the market is set to remain active, with projected volumes stabilizing at around €18 billion annually for the 2025-2026 period. The Italian market, in particular, is expected to maintain an NPL ratio of around 3%, thanks to a combination of loan disposals and effective portfolio management.
Key Phases of NPL Transactions (2017 Onwards)
The document highlights three critical phases in the evolution of the NPL market:
1. 2017-2018: A period of intense de-risking across the banking system.
2. 2019-2022: Focus on achieving a target NPL ratio of 5%, driven by bank-led transactions.
3. 2023 and beyond: Maintenance of a lower NPL stock, with the ratio stabilizing at around 3%.
Impact of Macroeconomic Factors
The report also indicates that macroeconomic issues, particularly rising interest rates and increasing costs, have exerted pressure on the real estate market, a key sector related to NPLs. For example, the number of judicial sales in 2023 dropped by 10%, while auction prices decreased by 26%, showcasing the direct effect of economic pressures on asset recovery rates.
Performance of Italian NPL Securitizations
Between 2016 and 2022, 35 securitized NPL portfolios in Italy (with a total gross book value of €99 billion) were analyzed. These portfolios have generally performed slightly below their original business plans, achieving 98.7% of their recovery targets in the first quarter of 2024, compared to 103.7% in the same period of the previous year. The performance variance is more pronounced in secured portfolios, with a decline of 7.4%, while unsecured portfolios showed a smaller average reduction of 5.6%.
Conclusion: A Stabilizing NPL Market
The NPL market in Europe is experiencing a phase of stabilization, particularly in countries like Italy that have shown resilience through proactive financial strategies and policy support. While certain regions like Germany and France face rising NPL stocks, the overall European market remains dynamic, with consistent transaction volumes and improving recovery frameworks.
Looking ahead, the NPL transaction market is expected to remain competitive, with improving portfolio management practices and an active secondary market for NPLs and Unlikely-to-Pay (UtP) assets. The Italian market, in particular, stands as a positive example of effective NPL management, potentially serving as a model for other European economies.
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